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United States v. Klimovitz

October 20, 2010

UNITED STATES OF AMERICA
v.
FRANK E. KLIMOVITZ, DEFENDANT



The opinion of the court was delivered by: Yvette Kane, Chief Judge United States District Court

Chief Judge Kane

MEMORANDUM

On July 29, 2010, the Court held a sentencing hearing at which the Government and Defendant Frank Klimovitz presented evidence related to the amount of loss resulting from the offense to which Klimovitz pled guilty. See U.S.S.G. § 2B1.1, app. n.3. This memorandum serves as a summary of the Court's findings as to the amount of loss calculation.

I. LEGAL STANDARD

The appropriate burden for finding sentencing facts, including loss amount, is by a preponderance of the evidence. United States v. Ali, 508 F.3d 136, 145 (3d Cir. 2007) (citing United States v. Grier, 475 F.3d 556, 561 (3d Cir. 2007) (en banc)).*fn1 "'The court need only make a reasonable estimate of the loss.'" Id. at 561 (quoting U.S.S.G. § 2B1.1, app. n.3(C)). The Third Circuit Court of Appeals will "accept the District Court's factual finding as to the amount of loss unless it is clearly erroneous." United States v. Brennan, 326 F.3d 176, 194 (3d Cir. 2003).

II. BACKGROUND

On July 15, 2008, a one count Information was filed against Klimovitz charging him with violating 18 U.S.C. § 1341 (mail fraud). Specifically, Klimovitz was charged with defrauding his employer, Jaxxi Products and Design ("Jaxxi"), via a fictitious product sales and invoice scheme from September 2007 to May 2008. (See Doc. No. 1.) On July 15, 2008, the Government filed a plea agreement. (Doc. No. 3.) According to the agreement, Klimovitz would plead guilty to the one count. (Id. ¶ 1.) The parties agreed that "the amount of the loss resulting from the defendant's actions [would] be determined by the Court at the sentencing hearing."*fn2 (See id. ¶ 7.)

On March 17, 2009, Klimovitz was sentenced on the one count in the Information. This Court imposed a sentence of twelve months and one day, a $5000 fine, a $100 special assessment, and three years of supervised release. However, on May 18, 2010, in part because no amount of loss hearing had been requested by defense counsel, the Court granted Klimovitz's motion to vacate his sentence pursuant to 28 U.S.C. § 2255 and reopened the case for re-sentencing.*fn3 (See Doc. No. 52.) To that end, the Court held a sentencing hearing on July 29, 2010, at which both parties presented evidence concerning the amount of loss caused by Klimovitz's wrongdoing. The Government produced the testimony of Lee Sponaugle and Erin Shirmer. Sponaugle was the sole owner of Jaxxi, a candy co-packing company which designed and created private label candy gift items. Shirmer is a certified public accountant, who functionally served as Jaxxi's chief financial officer.

At the July 29, 2010 hearing, Sponaugle testified that Klimovitz was hired by Jaxxi to help increase sales to $8 million by 2008. Klimovitz would receive a commission on everything he sold over $1 million dollars, with a cap of $15,000 in commissions. If Jaxxi reached its $8 million goal, Klimovitz was to receive a bonus. In the latter part of 2007, Klimovitz reported a sale of $750,000 worth of Jaxxi product to Big Lots for $1.3 million.*fn4 This alleged sale required Jaxxi to import approximately 200,000 tins from China and to purchase one million ounces of chocolate from the Hershey Company. The process of preparing the order took about six weeks. Before the order was delivered, Klimovitz informed Sponaugle that the order had been cancelled. A week later, Klimovitz found two other outlets for the already-assembled Jaxxi tins: Infinity Sales ("Infinity") and Kenny's. Klimovitz represented that the purchase order amounts for the sales to Infinity and Kenny's were the same as for Big Lots ($1.3 million). Yet after Jaxxi shipped the order to Infinity and Kenny's, it became clear that the amount agreed to by Infinity and Kenny's was much lower. Indeed, rather than negotiating to sell the $750,000 in product for $1.3 million, Klimovitz had arranged to sell it for just over $600,000. By the time this discrepency became clear to Sponaugle, Klimovitz had already been terminated. Before his termination, Klimovtz was paid a $16,000 bonus and $7,000 in commissions from the nonexistent Big Lots deal.

Sponaugle tasked Shirmer with the responsibility of determining the amount of loss Jaxxi had suffered from the misrepresentations by Klimovitz. Shirmer testified that to prepare her calculation of the loss, she relied on Jaxxi's QuickBooks accounting ledger. She calculated the direct cost of the inventory, shipping costs, payment by Infinity and Kenny's, as well as the indirect costs which were allocable to those orders. Her review resulted in Excel spreadsheets which the Government produced as exhibits at the July 29, 2010 sentencing hearing.

III. DISCUSSION

The burden to prove the amount of loss is on the Government. The Government has put forward evidence that the amount of loss suffered by the victim was $329,359.*fn5 The Government arrives at this calculation amount based on three components: (1) Jaxxi's cost of manufacturing and shipping the Infinity and Kenny's product ($938,122); plus (2) the commission and bonuses paid to Klimovitz that he did not earn ($23,000); minus (3) the monies Jaxxi received on the "grossly discounted sales" ($631,763).*fn6 (Doc. No. 60 at 1, 6.) The parties agree as to third component amount, that Infinity and Kenny's paid $631,763 to Jaxxi.*fn7 (See Doc. No. 60 at 6; Doc. No. 61 at 4.) The Court will address the first and second component amounts which the Government contends add up to the amount of loss. The Court will also address Klimovitz's argument that the tax benefit received by Jaxxi should be credited against the amount of loss.

A. Reliability of Government's Evidence

Before examining the separate component amounts, the Court must first address Klimovitz's general challenge to the primary source of the Government's evidence: Jaxxi's QuickBooks accounting ledger. Klimovitz asserts that although he "had formally motioned the Government to produce the original documents and invoices to establish the accuracy of the losses alleged," no original invoices were produced. (See Doc. No. 61 at 1.) Klimovitz asserts that the entries in Jaxxi's QuickBooks ledger are not reliable because they cannot "be verified without examining the actual original documents." (Id. at 3.) Klimovitz's expert, James Verano, a former IRS Agent and Manager of the Scranton IRS ...


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